Fourteen in every 100 Kenyans have defaulted on their bank loans, creating a lucrative business for debt collectors with the sector experiencing unprecedented growth.
Rising loan defaults on adverse effects of the Covid-19 scourge are creating a boom in the debt collection business with bankers and commercial traders signing up repossession companies.
The debt collection industry is now on a hiring spree and industry players have come together to create a formal group, the Association of Debt Recovery Agents – ADRA Kenyan chapter to don a professional look.
ADRA Kenya chairman Eric Oluoch who runs Nairobi-based debt Recovery Company Quest Holdings says he has doubled his workforce over the last two years to handle the flood of requests as default levels soar.
He says initially the sector was mainly eyeing business from banks but a rise in defaults across sectors has drawn work from the public sector, private schools and hospitals.
“There is an increase in business as many private and public sector companies outsource debt collection. During the Covid-19 period we had to double our workers here in Kenya and Uganda just to meet demand,” Mr Oluoch said.
An increasing number of consumers struggling with lost income in an economy battered by the coronavirus and rising inflation is fueling defaults.
Kenyans had defaulted on Sh482.6 billion bank loans as of April 2022, which is 14.1 per cent of outstanding debt.
Higher defaults were experienced in the digital loan space where typical Kenyan mobile borrowers juggle debts to survive.
There is no data on digital loans although a study by Digital Credit, Financial Literacy and Household Indebtedness by Peter Wamalwa, Irene Rugiri and Julienne Lauler suggest that at one point in June 2017, mobile phone default rates were upwards of 55 per cent.
Fintech has become one of the biggest users of debt collection services outside banks with the increase in mobile lenders that have flooded the market with easily accessible microloans.
Mr Oluoch says the high-risk retail fintech loans have attracted banks and other institutions such as Safaricom due to their high rates of returns.
“If someone is giving you Sh10,000 for a month at five per cent and can get you to borrow every month, that will be nearly Sh120,000 at 60 per cent. These fintech volumes are very high even though they are small and are coming into our side,” he said.
State firms and agencies are also turning to private debt collectors including the University of Nairobi, Kenyatta National Hospital, the National Construction Authority and Kenya Power.
These entities are joining the Higher Education Loans Board (HELB), which has pioneered the use of debt collectors to recover old students’ loans. Mr Oluoch says private schools, and hospitals are now joining the bandwagon seeking debt collection services for parents who shifted their children to public schools and patients who are having trouble settling huge hospital bills.
Kenya only regulates auctioneers who act as debt collection agencies under instructions from the court or secured creditors.
But the debt collection business has spread outside the ambit of the law and is practised by many players including lawyers, self-styled collectors and sometimes criminal gangs.
Mr Tito Omore who runs Kisumu-based collection company Blueribbons Holdings, which has been in the industry over the past 22 years, said the difference is in their business model as they operate more as relationship managers than enforcers.
He says while an auctioneer will come and cart away your security, debt collectors will come to bargain with defaulters to create a payment plan while offering waivers on penalties and flexible payment schedules.
Mr Omore says there are more than 100 players in the sector, a majority who operate briefcase outfits adding that they are trying to self-regulate and build professionalism through ADRA as they await guidelines from the government.
“Besides auctioneers and lawyers there are over 100 debt collectors with up to 60 per cent operating briefcase companies,” he said.
The debt association ADRA currently has 25 members that want to professionalise the industry which for years has been tainted by rogue elements who use brute force to enforce a charge, damaging and stealing the same assets they are supposed to claim.
Debt collectors in the digital space have also garnered a bad reputation for threatening borrowers and shaming them through unsolicited calls to people in their contact lists.
“This industry is still very nascent but a lot is changing, we now have our association where we plan to make it more professional and generally business is increasing as we see banks embracing the model of outsourcing defaulted debt,” Mr Oluoch said.
Mr Omore said there was a multi-billion shilling opportunity in the Kenyan debt market where they could buy off bad loans from banks at a discount and then recover the money.
This happens mostly in the developed world but the Canadian Amassment Corporation which provides balance sheet restructuring gave Kenya a sneak peek of this possibility when they offered to buy loans defaulted at collapsed Imperial Bank.
Amassment Corporation said it could grant depositors Sh49 billion, preference shares in a NewCo limited, a special purpose vehicle holding Imperial bank assets.
The preference shares would then earn unspecified yearly dividends for income made from recoveries of the loan assets while the company retains some of the revenues for growth and buying future loans.
The Canadian firm said depositors who would want to liquidate their stake in future would have the option of selling off through a private placement or exiting once the company is listed on a public stock exchange platform.
Amassment Corporation says they will establish an Advisory Board for NewCo, made up of banking and finance professionals from Canada, the US and Kenya, to establish long-term strategy, as well as ensure strong governance and accountability.
“In the developed world debt is bought and sold to collectors like us. In future we will also be able to approach banks and say give us your bad books at a discounted price, then we collect and make a margin from that,” Mr Omore said.